How’s it going today guys welcome back to the channel so in this video today we’re going to be talking about investing in the stock market as a complete beginner now this is actually a video I cover just about two years ago to the day back in October of 2016 I believe it’s my first ever one of my first youtube videos I made was called stock market for beginners and that video is still good it has some decent information but a lot of the stuff that I talked about in that video I have a slightly different opinion about it now and largely that is due to the fact that back when I made that video what I was doing was swing trading I was trying my hands as a swing trader and so oftentimes in that video I’m referring to trading as opposed to investing and so I kind of want to share with you guys what I’ve learned over the last two years of making videos relatively frequently about investing being invested in the stock market reading dozens of different books I have a lot of good information to share with you guys here so I’m going to cover with you my top ten stock market lessons that I’ve learned over the last two years and prior to that as well so it’s an update video from that video two years ago and it’s also you know a lot of information that I’ve developed and learned over the last couple of years as an investor so if you guys are not familiar with who I am my name is Ryan Scribner I’ve been investing in the stock market for about five years now like I said I started off as kind of a swing trader I’ve done many different things I’ve never been a day trader but I’ve tried swing trading I’ve tried you know betting on earnings reports and things like that and what I found over time is that the only time I was able to be predictably profitable my investing was by being a long term investor now my background is actually in electrical construction so I don’t have any kind of finance background I’m not a financial advisor so I am a self-taught stock market investor and so basically that is my background and that pretty much gets us up to this point here okay so now that we have that introduction there out of the way now I want to get into the basics and give you guys some realistic expectations when it comes to investing in the stock market or trading stocks or whatever it might be that you were looking to do because anybody who’s watching this video you could be in completely different areas in terms of what your look to learn some people might be interested in day trading some people might be interested in forex some people might be looking to get into crypto currencies some people might be looking to be a long-term investor and so what I want to do at this point is kind of give you guys realistic expectations as far as what you should be looking for out of these different investing mechanisms or methods of investing so first of all I want to share with you guys a statistic as far as active traders go now active traders are people who are buying and selling stocks on a regular basis this could be day traders this could also be swing traders it’s basically people who are making short-term moves in the stock market well they were able to look at data from different exchanges out there and determine how many of these short-term trades were actually profitable and what they found was that 90 out of 100 active traders were losing money so 90 percent of active traders end up losing money now of those 10 who actually make money one out of ten of those people are what you call predictably profitable so essentially your odds of being a predictably profitable short-term trader or active trader sits at around 1% so for every one successful trader there’s 99 who are unsuccessful now am i discouraging you from being an active trader absolutely not I think you guys should do whatever really interests you but I just want you to have realistic expectations getting into this and not thinking that you know most traders are successful that is not true most traders are unsuccessful about 1 percent are predictably profitable now let’s talk about investing in the stock market and being a long-term investor what are your odds of really being successful well what we can do is look at data from mutual funds to determine what is the average rate of people who are actually beating the market now when I’m referring to the market what I’m talking about is the S&P 500 it is the culmination of the 500 largest publicly traded US companies a lot of people will use this as a benchmark to determine how the overall stock market is doing and when people refer to themselves as beating the market it means they beat the S&P 500 return so over the last 15 years there was 15 years of data that this was used to calculate these numbers percent of large-cap mutual funds were able to beat the S&P 500 and ninety two point two percent of these large cap mutual funds fell under the SP 500 now these are professional stock pickers these mutual funds are managed by professional investors they’re managed by teams of people with billions of dollars of assets and they have so much money to devote towards research they have so many different members of their staff that are researching investments every single day and even with all of these different resources available to them just over I’m sorry just under 8 percent of them were able to actually beat the market so if you want to take a step back and think about well what are my odds of beating the market if only 8 percent of the professionals or less than 8 percent of the professionals are able to do it your odds of beating the market are not good now again is it possible to beat the market it absolutely is but I just want you to understand that the odds are not in your favor when it comes to being an active trader or when it comes to you know actively picking stocks and looking to beat the market am i trying to discourage you from doing this absolutely not my personal investing strategy is 50% individual stocks and 50% into index funds and so I do put half of my money my portfolio into individual stocks just because I really enjoy the process of picking stocks researching investments and so personally that is why I choose to do it and in the long run I do hope to beat the market but I know that really it’s never guaranteed and just in case I don’t that’s why I have half of my money in index funds where I’m actually owning the market now I forgot to mention this as well but if you guys are looking to learn more about investing in the stock market of course I have my youtube channel here with over a hundred different or probably 200 plus different investing videos I also have a blog I’ve been working on for the last couple of months it’s called investing simple top blog and I actually put together a article over there that’s more like a ebook it’s about a 10,000 word article called a beginner’s guide to investing in the stock market and it’s going to go through everything we talk about in this video but into a little bit more detail so if you guys are looking to learn more about investing that is a really good resource I’ve put together I’m very proud of it dozens of hours have gone into creating that so I’m gonna link it up down in the description below but I would appreciate it if you guys would bookmark my site investing simple dot blog because there’s going to be a lot of really good information over there for you guys who are looking to learn more about investing so the main takeaways I want you guys to get from this introduction here with your realistic expectations is that first of all active trading is not as lucrative as it seems a lot of people are running ads saying oh they’re making millions of dollars trading maybe they are maybe they aren’t but the data speaks for itself and it shows us that most active traders are unsuccessful and 90% of them are losing money the second thing we have to understand here is that it’s pretty difficult to actually beat the market and under 8% of the professional stock pickers are able to do this but there are some factors involved here and there are some limitations that these fund managers have they’re managing billions of dollars and they can’t nimbly move in and out of stocks and they’re limited to just investing in very large companies because they have to invest so much money to have a meaningful position and if they were buying small companies they would have to own half the company or more just to have enough skin in the game you as the retail investor have a couple of advantages one of the big ones being that you are not limited to just the largest 50 or the largest 100 publicly traded companies you could possibly unearth you know small cap value and find hidden gems that these large fund managers are overlooking so that is one of the clear advantages you have as the small retail investor and then finally like I said if you guys are really just looking to own the market you can be an etf investor you can go that self-manage approach which is what I do you know I buy ETFs I buy index funds you could talk to a financial advisor but if you don’t have a lot of money to be investing they may not take you on as a client but another option that has come up in the recent years is these Robo advisors and this is basically an algorithm based financial advisor and the key benefit to this is a very low fee structure and the fact that with betterment one of the most popular ones out there there is no minimum account balance so if you were to go to your financial advisor and say hey I want you to diversify and invest a hundred dollars for me they may not be able to do that for you because it’s not worth it for them but because better is a robo-advisor and their algorithm based it doesn’t matter they’ll take on very small accounts and if you guys are interested in signing up for betterment I have a link down in the description below it is an affiliate link you do not have to use it but understand if you do it helps to support my channel and allows me to make more videos like this okay so now we’re gonna go ahead and get into the first lesson here for the stock market beginners that you have to understand I’m sure you’ve heard it before and that is to buy low and sell high now I know a lot of people are thinking that this is just common sense everybody should know that the way you make money in the stock market is buying low and selling high but it’s not common sense because most people I hear from in the comments of my videos most people I talk to are doing the exact opposite of that they’re buying stocks high they’re buying at all-time highs hoping it’s possibly going to go higher and the thing is there’s no guarantee at that point that that stock is going to go any higher they’re buying high hoping for it to go higher but in most cases they’re gonna buy high and then they’re going to sell low so understand that especially as a beginner you are very prone to making this mistake of buying high and selling low which is the exact opposite of what you’re looking to do now the main place that this is actually happening is in something called a speculative bubble maybe a part of these before you’ve heard of the.com bubble if you’ve heard of the 2008 housing market bubble if you’ve heard of cryptocurrencies possibly even marijuana stocks these are speculative bubbles that form in the market and a lot of brand-new or novice investors get caught up in these and they can be a very painful learning experience now this chart over here is exactly what a speculative bubble looks like and I want to walk you guys through this process now while this might look like a fun ride if it’s a rollercoaster it’s not going to be a fun ride if you’re an investor because most people the general public the average retail investor while they’re getting involved right about here somewhere in this upward movement of this trend when the general public is learning about a particular investment and at that point it’s pretty much a slippery slope down hill I never invest in anything that’s having any bubble like appreciation but unfortunately that’s where a lot of the excitement is a lot of people hear about you know crazy returns that were being made with cryptocurrency or marijuana stocks or even you know technology companies and Internet companies in the 2000s and they want to be investing in the exciting new thing well here’s what you have to understand about these speculative bubbles number one here all the way at the very bottom left here we have the early innovators these are the people who really understand the technology or the innovation if we’re talking about Bitcoin these were the people who bought it in 2011 2012 very early on before it was mainstream they really believed in the technology and they were the ones who were the cutting-edge innovators of this trend now number two here that’s where we have the institutional investors the large investors they catch wind of these new investments long before the general public does and if they see this as a good investment they’re going to say okay we want to put some money towards this remember as we said earlier these professional fund managers have millions if not billions of dollars that they’re investing and they have teams of people doing research every single day they’re gonna hear about stuff before you do it’s just inevitable there’s no way that you’re gonna hear about a particular stock or particular cryptocurrency or anything like that before these large fund managers so they’re gonna take a look at it and they’re gonna say okay yes I want to invest this funds money into it or maybe when we uh you know want to stay away but right here at that number two that is when these large institutional investors are getting involved now where we see this line really start to take off and go up like a rocket that is when it hits the general public that is when the general public catches wind of a particular investment and the average retail investor is beginning to buy this particular asset and that is when we see it start to shoot up like a rocket and then come crashing down it’s happened so many different times guys try to avoid getting caught up in these speculative bubbles it’s not going to be a fun ride for yourself but it will be a very valuable learning experience now the other lesson I want to give you guys here one of my favorite analogies to share about buying low and selling high with the stock market is by using an example of looking at a grocery store so we all go grocery shopping or we at least have a general idea of what we’re going to be paying for certain products possibly soda or cold cuts or chicken you know we have a general idea of what these things are worth or laundry detergent so let’s say for example you regularly buy coca-cola yeah it’s probably bad for your health but whatever you’re buying two liters of coke and you buy one or two every single week and you know that you usually go to the store and you expect to pay two dollars for that two liter of coca-cola well all of a sudden you go to the grocery store and you find out that two liters are on sale for one dollar meaning that you can buy this two liter for half of what you normally pay what are most people going to do are they gonna buy just one probably not they’re gonna stock up and they’re gonna buy multiple items they’re gonna buy many different items here and they’re gonna buy a bunch of different two liters because of this massive sale going on so when you see prices of goods on sale people will stock up and buy more now on the other hand we have coca-cola stock coca-cola stock obviously this company makes coca-cola and this stock usually trades somewhere around $50 per share but let’s say for example this stock has a pullback and it goes on sale by 20% down to $40 per share people don’t buy it they’re afraid to buy stocks on sale you’ll go to the grocery store you’ll buy coca-cola soda on sale you’ll buy laundry detergent on sale but you’re not going to buy coca-cola stock or Procter & Gamble stock on sale because as soon as people see stocks going down they become fearful and they don’t want to invest so understand this again is another one of the cardinal reasons here why people are afraid to invest in stocks it’s because when they see them going down they say you know what I don’t want to be a part of that but that is the exact time when you should be buying is when these stocks are on sale it’s just like loading up on you know coca-cola when it’s on sale at the grocery store okay now the second lesson that you have to understand or learn as a beginner in the stock market is to ignore the noise now there is a blessing and a curse at this point in time or in this day and age and that is that we are surrounded by information streams and information outlets now this can be good and it can be bad but what this means that you always have people sharing with you their opinion about your investments or pretty much anything in general and so you really have to start to ignore the noise when you become an investor when you invest in a stock or a particular company or doing so because you believe in this company and later on we’re gonna go over some of the factors I look into or my investing plan so you have out laid or laid out you know a plan for your investment you know why you invest in this company and so your opinion shouldn’t be swayed by just anybody but today we have so many different things or outlets out there that could sway your opinion it could be people at work it could be the news stations it could be your television heck it could be YouTube there are a lot of people on YouTube now you know sharing their opinions on stocks myself included it could be Wall Street analysts it could be friends it could be bars the thing is when you become an investor and you’re investing in stocks it’s almost kind of like sports people talk about the stocks they invest in because it’s kind of a fun social talk but you have to make sure you have a difference there between you know the social side of being an investor and talking about stocks with your friends versus having anybody be able to sway your opinion and make you decide okay you know what my friend Joe says I shouldn’t buy this stock or or maybe I should sell it because you know Sarah is selling hers you don’t want to be following other people blindly or letting anybody sway your opinion and what you have to understand is that at the end of the day activity is what makes money for Wall Street they’re gonna make money when you’re active they want you to buy a stock on a Monday sell it on a Thursday next week buy a different sauce different stocks sell a stock that week they want you to be buying and selling stocks all the time because they make money from commissions they make money from trades and the more frequently you are trading your stocks and changing your mind the more they are making money so they’re gonna do as much as they can to share you know new stories they know that when they you know exemplify details and blow things out of proportion more eyeballs are gonna be on that news article so they’re gonna do everything they can to make things sound more dramatic than they are and this is why typically speaking you get more drastic reactions to events in the stock market than you should now as a smart investor or an informed investor you understand that’s where opportunities might lie is when there’s a drastic overreaction to some kind of news report but understand that most people are going to make that mistake of listening to too many sources getting too much information and you know maybe even to be making bad decisions because of what their friends say or what they’re hearing on YouTube or what they’re seeing on TV now what about stock tips on the other hand what if you’re at the bar or you’re at work and one of your friends comes up to you and says hey I got this great stock tip for you my friend works at this company he says the stock is going to go up or this stock is gonna get you know acquired by another company you should buy in right now should you listen to stock tips well this is what I have to say about that your investing strategy at the end of the day needs to be two things number one it has to be scalable that way it works with $10 it also works with a hundred it also works with a thousand ten thousand and so on so it works the same amount of money you put in regardless of if you have a little bit of money or a large amount of money and second of all it has to be repeatable at the end of the day your investing strategy has to be something where you can consistently put money into it and it can pretty much reliably put money out for you and spit money out based on your strategy is the strategy of getting random stock tips at the bar or at work a good investing strategy it’s certainly not repeatable because you don’t know when you’re going to get your next tip even if you’re right even if that person is right and you buy that stock and it goes up like a rocket and you sell it and you make a bunch of money what is your next move is your next move just to wait until somebody else randomly comes up to you with a stock tip or you overhear a conversation at work that is not an investing strategy and I would discourage you from following it and falling into this mistake of listening to stock tips you need to learn to make your own investing decisions and if you don’t want to do that then you should just be a passive investor you should you know you could be self-managed like I said like I am myself by buying ETFs you could look into a Robo advisor a financial advisor but you should let somebody else you know make these decisions on your behalf or just be somebody who owns the broad market rather than picking stocks and as far as keeping track of your investments in reading news articles and being informed as an investor you need to understand there’s a very fine line between being informed and being obsessed it’s very easy to become obsessed with investing or obsessed with your stocks and you’re just taking in too much information at once and the issue with that as it’s going to cause you to make jump decisions personally I don’t read every news article about the companies I invest in I do read earnings reports and I do keep track of major interviews with management but as far as the short-term noise goes I pretty much just ignore it because I make sound investments based on my strategy and based on my own research and I don’t let the you know the thoughts and feelings and what others have to say about my investment sway my decision okay so the third lesson I want to teach you guys is one that comes from this book right here it’s called the Intelligent Investor by Benjamin Graham one of the best books if not the best book on investing out there I have a link for it down in the description below if you guys are interested now it is a book that is almost or I think it’s over 600 pages so it’s not a light read at all very small text but it is a very valuable book and this is a lesson about the stock market being like a pendulum now this is something that Benjamin Graham said himself in this book he says the stock market is like a pendulum forever swinging between unsustainable optimism and unjustified pessimism and it looks exactly like this you at some points have people who are fearful in the market people are afraid to hold stocks and it swings over here and you get an overwhelming supply of stocks hitting the market and the market going into a sell-off and then other times people are very you know believing in stocks they want to be investing in stocks and they’re buying them left and right and people are getting greedy and that is when you have demand this is basically at the end of the day the basics of supply and demand that is all the stock market is and you have to understand that this is controlled simply by two emotions and that is fear and greed fear causes people to sell off that causes a supply to hit the market and as such the prices fall and then greed causes people to buy stocks left and right the demand goes through the roof and then prices surge and it’s always going to be happening and it happens on a minute-to-minute basis a week to week day to day basis a year to year basis so you’re always seeing this take place with the market the swinging back and forth between unjustified pessimism and unsustainable optimism now one of the important things you have to understand looking at this is that you should never fall into something called FOMO and this is exactly what caused those speculative bubbles to form in the market FOMO is the fear of missing out a lot of people fall into FOMO when they see a stock or an asset going up like a rocket and they say oh my gosh I missed out I should have bought earlier I should have bought last week or last month but I’m gonna buy it now because it’s gonna continue going up like a rocket that is the mistake people make because we know now that the stock market is always swinging between optimism and pessimism and that particular stock right now is swinging toward unsustainable optimism and rather than buying it at this all-time high price and trying to get in on this moving train you should be patient and wait for that pendulum to swing back into the other direction for example one of the stocks that everybody has been trying to get their hands on is Amazon everyone loves Amazon they want to be a shareholder and that stock has hit a high I believe of over 2000 dollars this year and we are just now seeing a good pullback with Amazon stock I believe it was around $1500 today somewhere between 1500 and 1600 and this is one of the first sizable pull backs we’ve seen with Amazon stock because they had earnings that did not please Wall Street investors or analysts now that is the time when you want to say okay I’m going to be greedy when others are fearful take advantage of that sale I understand that investors are prone to overreact to the news so I’m going to capitalize on that overreaction that is when you buy as an investor you don’t see Amazon stock at $2,000 a share at all-time highs and say okay FOMO was triggered I’m afraid I missed out I better buy and get out and on this now before it goes even higher so always wait for the right opportunity to buy it might take a while but it almost always presents itself just to be patient the stock market is honestly a waiting game more than it is anything it’s waiting for the right time to strike waiting for the right time to buy and just being patient and really you know understanding it’s a long term investment if you’re gonna be an investor it’s going to be something you’re doing for the long term and just be patient and wait for that right opportunity okay lesson number four is very important as well this is a lesson that comes from both Benjamin Graham and Warren Buffett and this is investing in what you know or understand and or what Warren Buffett does and that is investing in very simple easy to understand businesses so all of these companies I’ve listed out on the bottom here our companies that Warren Buffett owns and I want you to think about these companies as I go through the list here we have American Express we know everybody buy stuff every single day we need credit cards we need ATM cards debit cards American Express payment services very simple easy to understand business number two Bank of America we got to have a place to put our money we don’t want to put it under our mattress Bank of America very sound investment one of the largest financial institutions out there number three Apple this has been one of the only investments that has really deviated from Buffett’s core strategy of avoiding technology companies but Apple has been in the market so long now they’re not going anywhere their products have become an everyday a part of our lives an essential part of our lives so at the end of the day we know people buy iPhones every single year people love Apple products pretty easy business to understand coca-cola people buy coca-cola products they have thousands of different beverages people drink them every single day Southwest Airlines we know people have the need to travel for business or vacations all the time airline stock makes a lot of sense Delta Airlines as well same thing and then Phillips 66 that is a petroleum company we know people are always using gasoline to drive we need gas for different things again very simple easy to understand businesses do you see Warren Buffett buying cryptocurrencies do you see Warren Buffett buying into marijuana stocks or biotech stocks or mining companies no because those are not simple businesses they’re not easy to understand if you want to invest in a biotechnology company go ahead you can invest in whatever you want to that’s one of the beauties of being an individual stock owner is there are thousands of different companies that you can buy but I just want to encourage you to at least have a basic understanding of what it is that you are investing in and I would say as well the simpler it is the better and if Warren Buffett wouldn’t buy it maybe you shouldn’t be buying it now if you do understand biotech companies if that’s the business you’re in yourself or you understand mining or you understand you know some of these really expect industries then by all means you can invest in these things but if you don’t understand them how are you going to know what you bought when the company falls on hard times and that stock crashes what are you gonna do how are you going to know whether or not to hold that company take your losses what should you be doing at that point you’re not going to know what to do because you’ll have no idea how to value this company or what exactly is going on because you don’t understand the business invest in a business that you understand now one of my favorite ways to test myself on the understanding of a company I purchase is the 30-second elevator pitch what this basically is you can do it to yourself you can do it to your dog or do it to your friend you’re going to give a 30-second pitch basically explaining what a company is and what their business is and if you’re not able to do that in 30 seconds in a very clear manner that anyone could understand then you probably don’t understand this company well enough to be an investor so if you’re looking into a particular stock and you want to gauge whether or not you have a good understanding of this business try the elevator pitch with a friend or like I said with your dog and see if you’re able to do it and if not you might have to do more research or maybe you should consider investing in something else entirely okay lesson number five is to plan out your investments and plan out your purchases in the stock market investing without a plan is pretty much the same as trying to start a business without a plan you’re pretty much doomed from the start you need to have a plan when it comes to investing and what you’re looking to purchase and at what specific price now this is a very very basic plan with four different elements and this is the bare minimum of what I would do if I were to be investing in individual stocks now you could go above and beyond this I certainly encourage you to but at the very least these are the four things I would be able to identify before I began buying a stock number one the price you want to understand what is the price you’re willing to pay for this particular stock are you looking for it to come back and fall back to a support area what price are you looking to buy yeah and this could be arranged so for this example here I’m gonna be using Amazon this is a company that I would be willing to buy at the price of 1350 to $1400 now the reason being is because I was an early Amazon Sheriff they’re not super early but I bought in at about 950 and I ended up selling at 1350 now that stock again went on from there to $2,000 a share so I sold out very early but if I could get back in at a price around what I sold it for I would be willing to get back in an Amazon stock because I believe in it for the super long term now the second thing you want to look at as I mentioned is the term how long do you plan on holding this investment is it for one year is it for five years ten years for your whole life you want to have a general idea of how long you plan on holding on to this stock so for me if I were to purchase Amazon stock I know I would want to hold on to this company for at least ten years because I think it’s going to have you know tremendous success in the long term the third thing you want to look at is the weight and that is how much weight the stock is going to carry in your portfolio and that’s going to make a little bit more sense when we talk about the next lesson which is to diversify you want to have an idea of how much weight the stock is going to carry in your portfolio and so for me I would be comfortable with having a 10% stake in Amazon stock of my total portfolio so it doesn’t matter if you’re investing two thousand dollars twenty thousand dollars five hundred thousand dollars what you should care more about is the weight that that’s going to carry in your portfolio and then the fourth and final thing you should have is a thesis or basically a statement of why you are buying the stock and that is your general theory towards why the stock is going to hopefully go up in price over the next ten years in this case and my bullish thesis on Amazon is simply that consumer shopping habits have changed more people are buying online I think ecommerce is going to be huge it’s going to be even bigger than it is today and Amazon is gonna benefit from this growth of e-commerce that is my bullish thesis surrounding the stock and you should have exactly this in place for any stock you’re preparing to buy okay lesson number six when it comes to investing is to diversify and I’m sure you guys have heard the saying before don’t put all of your eggs in one basket that is the basics of diversification if you got a hole in that basket all of a sudden all of your eggs fall onto the ground and break you know you’re out of luck at that point you have eggs in different baskets you want to be diversified now a lot of people ask me do you need to be diversified from day one let’s say you’re investing a thousand dollars in the stock market it’s hard to diversify a thousand dollars because stocks all trade at different prices so let’s say you want to invest in a stock like Amazon or Google those stocks are over a thousand dollars you might not even be able to afford one share so how would you be able to be diversified without you know having tens of thousands of dollars to invest now there is an alternative to this there’s a new brokerage company out there called m1 finance and they allow you to buy fractional shares free of charge it’s really amazing what they offer but you can buy as little as one ten thousandth of a share which means that you could build a well diversified portfolio with as little as $1,000 so I’m gonna link that up in the description as well a link to m1 finance it’s an affiliate link you guys don’t have to use it but again like I said it helps me out help support my channel and allows me to make more videos like this but m1 finance is in my opinion the best platform out there to build a diversified portfolio with a very small amount of money now if you don’t want to do that and you want to be diversified in my opinion I feel that you should worry about that once you have $10,000 or more invested up until that point you don’t want to put all of your money into one particular stock but you don’t want to worry so much about you know sector diversification and you know buying different companies and having money in different areas that early on because you want to build a meaningful position in these companies and so if you’re investing a thousand of $10,000 like I said in my opinion you don’t necessarily have to be diversified but once we’re talking about $10,000 or more that is when I believe it’s more important to become diversified in the stock market now on the other hand there is such thing as being too diversified and it’s a trap that a lot of people fall into I can remember one person I talked to I think it was a little over a year ago now and this was an individual who had $5,000 invested in the stock market and he owned 57 different companies so most of his most of his investments were just one single share of this stock now that on the other hand is not diversification is just stupidity this guy had way too many stocks way too many eggs and way too many different baskets and it was just all over the place if you’re gonna do that just invest in an index fund with diversification built in personally I’d like to hold no more than five individual stocks right now I have five maybe I would have five to seven as I have more money to invest but that is about as many companies as I want to keep track of as an investor you’re keeping track of earnings reports and annual reports and keeping track of these investments and every stock you put into your portfolio it’s another company to keep track of so what that number is for you it’s going to be different for everybody but for me I know five to seven is a good number and that’s I’m able to keep track of you know reports and be an informed investor on five to seven different companies this guy who held 57 different stocks there’s no way he could ever keep track of all those investments and that’s pretty much what he said to me he said you know what I have no idea why I own these stocks I don’t know why they’re going up or down and I don’t know what to do so don’t be that person that confuses this with overly diversifying and buys 50 different stocks that is not diversification okay now lesson number seven is one of the most common mistakes I see with beginners in the stock market and that is thinking that a low share price indicates that that stock is cheap and a high share price indicates that that stock is expensive it is not true and I’m going to show you guys exactly why that is so let’s take two telecom companies for example here on the left there we have AT&T that stock trades at about $30 per share and on the right we have frontier communications and that stock trades at $5 a share so is AT&T six times more expensive than Frontier Communications absolutely not and that is because the share price has absolutely nothing to do with whether or not a stock is cheap or expensive and that is because it comes down to a very basic formula for calculating market capitalization now market capitalization is very simply the value of a publicly traded company for example we know that Apple has a market cap near or I believe above one trillion dollars it might not be right now but at some point in time recently it’s been over a trillion dollars the market valued that company at around one trillion dollars and that is calculated by taking these shares outstanding and those are the shares out there that are offered to both public and private investors all shares that could possibly change hands times the market price now a company has no control over market capitalization because that is set by the market what people are willing to pay for the stock dictates the overall value of that company but what the company can control is this number right here shares outstanding that is the only factor in this formula that a company can manipulate and that is the shares outstanding so let’s look at two examples your company a and Company B Company a this company has a market capitalization of 1 million dollars and they have 100,000 outstanding shares that could possibly change hands giving each share a market price of $10 per share now company B on the other hand they also have a 1 million dollar market capitalization the same exact valuation and they have 1,000 shares outstanding giving them a market price of $1,000 per share if you don’t understand this lesson here you might look at this and say Oh company a is really cheap Company B is really expensive it has nothing to do with the share price it has to do with a lot of different factors you know it has to do with the price to earnings ratio a lot of different ratios that are above and beyond the scope of this video but as you become a more seasoned investor you’re going to learn about fundamental analysis that is how you essentially determine the valuation of a company and whether or not a stock is cheap or expensive but just understand it has nothing to do with the share price and penny stocks are not cheap penny stocks are not cheap so many people make this mistake they look at a stock that’s trading for pennies a share and they think oh you know I can buy thousands of shares versus buying you know one share of Amazon and they think they’re getting a better bang for their buck but they are just not it has nothing to do with the share price it just has to do with the shares outstanding the number of shares available to the public or private and a lot of people fall into that trap of buying a stock especially a penny stock because they think it’s cheap okay now lesson number eight for the stock market beginner is understanding the time value of or basically understanding compound interest now the basics of this is that there are two different schools of thoughts out there a lot of people believe that in order to make a lot of money in the stock market you have to have a lot of money and while it may help you it is not a necessary prerequisite so it doesn’t matter how much you invest what matters is how long you invest the stock market allows you to earn compound interest and compound interest is that time value of money it doesn’t matter how much you invest it matters how long you invest so even if you only have $50 or $100 a month to spare or even less it doesn’t matter whatever you have put it to work for yourself for a very long period of time deploy that cash for 20 30 40 years and you will be amazed what that will do for you as long as you apply these other principles we’ve discussed going forward and in the past here already but I want to show you guys a basic calculation here looking at compound interest and I encourage you guys to play around with a compound interest calculator after watching this video I’m gonna link one up down in the description below just to understand the power of compound interest you know Warren Buffett attributes a very large amount of X of his success to compound interest Einstein called the eighth wonder of the world all for a reason so what we’re looking at here is $100 invested earning a 7% compounded rate here and you can earn compound interest through the stock market through dividend stocks you can earn it through your bank through real estate some methods are better than others obviously but in year number one you earn seven dollars interest on that investment now you’re number two on the other hand you earn that seven dollars but you also earn forty-nine cents where did that forty-nine cents come from that came from a 7% return on that seven dollars you earned the year prior compound interest allows you to earn interest on the interest you’ve already earned so this is what makes you rich it’s not this little number here the seven dollars of simple interest you’re earning it’s that compound interest you’re earning on that investment in year number two it’s 49 cents you’re number three it’s a dollar fifty the year number for three dollars and eight cents you’re number five you’re looking at five 26 year number six you’re looking at eight dollars and seven cents it’s that compound interest that is what makes you rich at the end of the day and you need to understand it you need to understand how to apply it and understand how powerful this actually is for you and another common misconception out there that people have is they think that investing is linear they think they’re going to earn simple interest and their investments are going to go up in a straight line that is just not the case what they’re going to experience instead is an exponential growth curve and that is what this is right here yes it starts off very slow but over time that curve really shoots up and it just becomes unbelievable and this is what we call the snowball now the snowball is also the title of one of my favorite books it is the snowball the biography on Warren Buffett’s life that title is there for a reason it’s because like we said Warren Buffett attributes a large amount of his success to compound interest and he refers to this concept as the snowball again great book I’m gonna link it up in the description below but again it’s almost a thousand pages so it’s definitely not a light read but the concept of the snowball is because that is exactly what compound interest is like it starts off very small it’s like packing a snowball together and rolling it around in your backyard as a kid if you’re making a snowman well at first you can’t even tell that snowball is growing because it looks to be the same exact size but the larger that snowball becomes the more snow it can accumulate and the larger it can become it grows at an exponential rate and that is exactly what can happen with your money if you allow it to take place over time if you deploy your cash and you earn compound interest and you don’t touch that principle and you just allow your money to grow into more money you’re earning compound interest and you’re building a really massive snowball for yourself and at a certain point in time that snowball just rolls on its own it just rolls on its own and accumulates so much more snow and that is exactly what you can do for yourself by earning compound interest and understanding this powerful principle so what you need to understand here is that you need to start early if you’re a young person you have a huge advantage on your hands and that is the fact that you have time you have 20 30 40 50 years to allow your money to grow and to allow compounding to take place and there so many people that try to do this in their 40s or 50s and they just don’t have nearly as much time and they’re not able to see this magnificent result because they’re only going to experience a very small amount of growth as a young person you can experience this whole exponential growth curve and build that massive snowball so you have to start early and the other thing you have to realize is if you’re investing in any stocks that pay dividends in order to earn compound interest you have to reinvest those dividends so if you’re not if you’re getting your dividend checks and you’re not using that money you should consider reinvesting those dividends because at that point you can earn dividends from your dividends also known as compound interest so that’s one of the best ways to earn it is by being a dividend investor and reinvesting those dividends okay now lesson number nine is another lesson from this book right here the Intelligent Investor by Benjamin Graham like I said the link is in the description below and that is a lesson on what is called a speculation now this is a very important quote from that book I believe this is one of the very first chapters of this book talking about the difference between investing and speculation I want to check here it’s actually the first chapter it’s chapter one for a reason it’s very important you understand this lesson because so few get this the difference between an investment in a speculation this comes right out of the book an investment operation is one which upon thorough analysis promises safety of principle and a satisfactory return that’s a quote right from the book by Benjamin Graham that is what an investment is so what is a speculation a speculation meets these three criteria number one analysis is not thorough somebody has not done their research and they’re looking to deploy their cash number two the downside is in some cases a hundred percent it’s not a case where it promises any kind of safety of principle there’s no safety of principle considered at all here and then number three an unreasonable return is hoped for they’re not looking to make you know a satisfactory return they’re looking to make enormous return and that and those right there are the characteristics of a speculation I’m not discouraging you from doing them I’m simply telling you you should follow Benjamin Graham’s advice and that is speculate with no more than 5% of your total investment portfolio so if you have $10,000 take $500 put it in a separate investing account and let that be your speculating account now the reason that you do that and this again is a recommendation from Benjamin Graham is because you do not want to confuse investment with speculation you do it in a separate account you make sure you realize it’s a different thing and you don’t allow it to affect your investment decisions because they are polar opposites and what he recommends as well is don’t continue to add more money to your speculating account because if it’s working for you and you’re speculating and you’re making money well you can reinvest the money that you’ve made but if it’s not working for you and it’s a losing strategy why would you want to funnel more money into a strategy that’s not working for you so speculate with no more than 5% of your portfolio and do so in a separate trading account okay and number 10 the final lesson I have here is that timing the market is impossible you really should not try to do this so many people have this idea that they can get out of the market at the perfect time sell at the top and buy back at the bottom and it just doesn’t work out and practice the way that you think it’s going to the stock market is not an elevator it doesn’t get off at the top and then get off at the bottom it goes up and down and up and down because we understand the pendulum taking place there swinging between you know unjustified pessimism and unsustainable optimism it’s always swinging back and forth and as a result that price is always moving up and down there are never clear bottoms or clear tops to a market it’s pretty much impossible to try to time the market now there are some strategies that you can deploy if you believe the market is nearing a top and I’ll include an article in the description below that talks about that but you don’t want to simply move into cash when you believe the market is overvalued and I want to share with you guys an example of somebody that I know who did so my dad is a financial advisor he has people that come to him and he manages money for them and in November of 2016 when Donald Trump was elected he had somebody called him up on that Monday and he said the stock market’s gonna crash Trump is a maniac he’s gonna ruin this country I want you to cash out all of my investments and my dad said are you sure you want to do that because you know most people recommend regardless of what you think in the short term you should stay the course money is made in the stock market over the long term this guy said nope cash me out and so he did and he got out of the market when the S&P 500 was around $2,000 that was November of 2016 so fast forward two years just about and we’ve had one of the most extraordinary bull runs 2017 was an extraordinary year for the stock market in that 2000 S&P 500 in September of 2018 just about two years leader was 2900 that is a 45 percent return from the market this guy completely missed out on because he was certain the market was gonna crash and he decided to get out because he felt he identified the top and he was gonna buy back at the bottom and as a result he missed out on a 45 percent return from his portfolio so you don’t want to be like that guy you don’t want to treat the stock market thinking like it’s an elevator you can just get off and then you know get back on at the bottom floor it’s not gonna work that way in practice when you do see a correction taking place there are many false tops and many false bottoms that are gonna trick investors it’s not a game I recommend playing and what I would say instead is more valuable is time in the market time in the market is always better than timing the market it’s just not a great strategy to follow money is made through the stock market in the long term and even if stocks fall in the short term if you’re a dividend investor you know you’re still going to earn your dividends you can still reinvest them and earn a return through dividends you can dollar-cost average there are all kinds of different strategies you can follow but dumping all your money and moving into cash is not a great strategy I certainly would not recommend it okay anyways guys that’s gonna wrap up this video for those of you that actually watch this whole thing I want to thank you so much for spending your time with me I certainly do appreciate it as I’m sure you can imagine a lot of time and energy went into planning this video so all that I ask is that if you know somebody who’s looking to learn more about the stock market just share this video with them and maybe bookmark it for you know if some further learning down the road if you’re looking for a refresher but thank you guys so much for watching feel free to check out my channel also subscribe if you want to see more you know investing related videos and like I said as well investing simple that blog that is my investing blog and I have a article over there called a beginner’s guide to investing in the stock market it is like over 10,000 words it’s basically like an e-book at this point and it goes into everything we covered in this video here so if you were taking notes you might find better pieces over there or you know a more complete structure so all that is linked up in the description below but thank you guys so much for watching and I hope to see you in the next video
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